What the investment chief at America's oldest private bank has to say about the future of US markets

Founded in 1818, Brown Brothers Harriman arranged America’s first initial public offering and once held a monopoly on mail delivery to Great Britain.
Scott Clemons is BBH’s chief investment strategist, and a 26-year veteran of the bank.

Business Insider caught up with him to talk markets, monetary policy and the changing nature of asset allocation.

The bank has $26.9 billion in assets under management in private banking, approximately $58.6 billion in AUM in investment management and $4.1 trillion in assets under custody in the investor services business, according to the company.

What follows is an excerpt from the conversation, which Business Insider has edited for length and clarity.

Tina Wadhwa: Can you tell me your view of the markets right now?

Scott Clemons: Equity returns are likely to remain modest until corporate earnings rebound and “refuel” the market. With earnings in retreat and valuations at historically high levels, equity prices are also likely to remain volatile, overreacting — both on the downside and upside — to external developments. What is true of the overall market is, however, not necessarily true of every stock within the market, and our managers continue to find opportunities to put capital to work.

Wadhwa: How do you view asset allocation in a negative/low interest rate environment?

Clemons: In an environment of low to negative interest rates, we are relying on fixed income as a source of price stability and liquidity, not a driver of return. The downside risk to bond prices in a rising rate environment (even if that rise is modest) poses unacceptable risk. Within our fixed income portfolios we are pursuing some excess return through credit risk, but not through duration risk.

Wadhwa: What do you see as the impact of Brexit on asset allocation, if any?

Clemons: Brexit is a process, not an event, and the uncertainty surrounding the process is likely to create price volatility and therefore opportunity for disciplined, value-based investors. We have not altered asset allocation in anticipation of those disruptions, but we do expect that our non-US equity managers will find opportunities to invest in companies with exposure to Brexit uncertainty.

Wadhwa: What is the future of monetary policy? It seems like Central Bankers have exhausted their options.

Clemons: The real culprit of constrained economic growth in the US is the household deleveraging that began in the wake of the 2008-09 financial crisis. Monetary policy has enabled that dynamic by keeping interest rates, and therefore debt service levels, low. We question the ability of central bank policy around the world to solve economic problems, while acknowledging that easy monetary policy buys time to put the right policy solutions in place, and those differ from economy to economy.

Wadhwa: You have over 26 years of experience at BBH. What are the biggest changes you have noticed through the years? What are the major challenges?

Clemons: The biggest opportunity facing BBH’s private banking business now is helping our clients transition wealth and values to younger generations. This isn’t necessarily a new or unique circumstance, but the scale of the wealth undergoing this transition, coupled with the complexity of tax and estate laws, makes it more challenging. Prudent portfolio management is part of the solution, but it only works when integrated with careful estate planning, family communication, and education of the next generation.

Wadhwa: How does your wealth management advice differ from the older generation to the newer generation? What asset allocation do you recommend for them? Has your asset management advice changed?

Clemons: Younger generations of investors enjoy the benefit of time, and are better positioned to weather short term price volatility in pursuit of longer-term returns. All else being equal, younger investors have higher allocations to equity, and (if qualified) higher allocations to managers which require lockups. Having said that, asset allocation is a customised solution at the individual or family level, and can differ widely between clients of the same age.

Wadhwa: What impact will the election have on asset allocation?

Clemons: We do not anticipate shifting our asset allocation in anticipation of or response to the outcome of the November election. Depending on the makeup of the White House and Congress, tax laws may change in a way that alters our estate planning advice and execution.

Wadhwa: What advice can you give to millennials for their investment portfolios?

Clemons: Successful investing is a marathon, not a sprint! Resist the siren song of short-termism and focus on longer-term goals (retirements, education, philanthropy, etc.) that you want your investment returns to support.

Wadhwa: How do you see technology and digitization changing the financial services industry and in particular, changing investing?

Clemons: Technology and digitization are not new developments, but simply a continuation (albeit at an accelerated pace) of trends underway for several generations. Clients appreciate and expect instantaneous and real-time access to portfolio information, but the risk attached to that frequent access is that it encourages frequent investment activity, whereas preserving and growing wealth over time requires a patient approach that allows the miracle of compounding to work.

Wadhwa: Do you see a threat from digital investment advisors, robo advisors like Betterment and Wealthfront etc.?

Clemons: The future of wealth management is the integration of technology and human insight: these are complementary dynamics, not adversarial. Furthermore, comprehensive wealth management involves much more than asset allocation and portfolio management. Technology will complement those activities, but not replace them.